Your ?rm
Subject:FinancePrice: Bought3
Your ?rm. Crackle enterprises has been In the business of manufacturing Diwali lights for the past 10 years. This year it Is considering a new project which would be similar In terms of risk to its existing projects. The ?rm needs a discount rate for evaluation purposes. The ?rm has enough cash on hand to provide the necessary equity ?nancing for the project. 1. Also. the firm has 10.00.000 common shares outstanding current price Rs. 11.25 per share. Next year's dividend expected to be Rs. 1 per share and the ?rm estimates dividends will grow at 5% per year. 2. It has 1.50.000 preferred shares outstanding. The current price of preference share ls Rs. 9.50 per share and dividend is Rs. 0.95 per share. If new preferred shares are issued, they must be sold at 5% less than the current market price (to ensure they sell) and Involve direct ?otation costs of Rs. 0.25 per share. 3. It has a total of Rs. 100.00.000 (par value) in debt outstanding. The debt Is in the form of bonds with 10 years left to maturity. They pay annual coupons at a coupon rate of 11.3%. Currently. the bonds sell at 106% of par value. Flotation costs for new bonds would equal 5% of par value. 4. The ?rm's tax rate Is 40%. Do the necessary treatment to detem'ilne the appropriate discount rate for the new project? (4)
